In late January 2020, before the spread of Covid-19 reached the EU and the United States, a

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In late January 2020, before the spread of Covid-19 reached the EU and the United States, a subsidiary of Alpha Corporation reached an agreement with a real estate representative in Stockholm to purchase a commercial property there for 136 million euros. The Alpha’s subsidiary, REITs Alpha or RA henceforth, is a REITs company that holds real estate commercial and residential properties worldwide, but mostly in the United States. As a part of the purchase contract, RA (=REITs Alpha) paid 15 percent of the purchase price upfront as down payment deposit. The rest was agreed to be paid upon closing which was agreed to take place after six months, i.e. end of July 2020.

The RA treasury department had already identified that about 10 percent of the total purchase amount could be financed by the retained earnings of the company. No cash available.

RA may opt for a short term loan in USD for remaining amount that is due. Federal fund rate (FFR) has been a quarter of one percent, RA’s interest rate (in this case, mortgage rates for the purchase of the property) is 4.6 percent.

RA may also opt for a very short-term bank loan roughly at the same interest rate. This is not withstanding the fact that RA’s euro deposit account in Stockholm pays only 2.5 percent return per year. The mortgage or the bank loan in USD can be arranged immediately and the cash amount could be available by the end of February in the RA’s treasury department account.

Unless the borrowing or lending rates are dictated, RA uses its WACC (currently = 8.00 percent) in all its computations that involve time value of money.

Though the currency rates between the dollar and the euro were roughly stable in the vicinity of $1.10 for one euro prior to the spread of Covid-19, it does not seem to be the case anymore.

RA treasury, using consensus forecasting, has reached a decision that the projected value of the euro per USD may not reach $1.20 by the end of July. Further, they have obtained a six-month forward rate on Euro to be $ 1.18 per euro.

Other measures in the RA treasury department is information on the options market. RA concluded that it could buy a six-month call options contract on the remaining euro due amount at the strike price of $1.19 with a premium cost of 1.2 percent.

Best way to pay off remaining balance.

Armed with the above information, the RA treasury analyst was then confused as to what to do. What is the best alternative for the company?

What are the best alternatives for this company?

Briefly describe alternatives to follow.

What the pros and cons of each alternative may be.

The RA action in managing this exposure was inadvertently postponed. Consider the information in this case to be as of the date of actual transaction, i.e., end of January, 2020.